Dagong Global Credit Rating Co., Ltd.
September 27, 2017
Dagong Global Credit Rating Co., Ltd. (hereinafter referred to as “Dagong”) has decided today to upgrade the outlook for the sovereign credit ratings of the Republic of Indonesia (“Indonesia“) from negative to stable, while maintaining its local and foreign currency sovereign credit ratings at BBB-. Indonesia‘s political situation is tending towards further stability, and domestic demand will continue to cause Indonesia’s economy to grow at a relatively rapid rate. Although the government’s fiscal deficit will widen slightly, a relatively low debt burden and available debt repayment resources will help ensure the general government’s solvency in both local and foreign currency.
The main reasons for upgrading the sovereign credit rating outlook of Indonesia are set out below:
1. The debt repayment environment of Indonesia will continue to improve. Both the expansion of President Joko Widodo’s governing coalition and a higher degree of public satisfaction will contribute to stabilizing Indonesia’s political situation, further guaranteeing the ongoing implementation of structural reform, including the upgrading of domestic infrastructure, optimizing fiscal expenditure, and improving people's livelihood. In the short term, Indonesia’s inflation pressure could be managed, and its monetary policy will remain accommodative, which will strengthen the support of the credit environment for the real economy. Meanwhile, the capital adequacy and profitability of Indonesia’s banking system will remain at a relatively high level.
2. Indonesia’s economy will grow rapidly in the short term, and has great growth potential in the medium and long term. In 2016, the steady growth of domestic consumption and a gradual recovery in investment have helped Indonesia’s economy attain a growth rate of 5.0%. In the short term, consumption will go up as a result of the country‘s intensifying middle class and the government’s economic stimulus package, while investment will continue to recover as inspired by the government’s infrastructure construction plan and the expectation of a slight rebound in commodity prices. Indonesia’s economy is expected to grow by 5.1% in 2017 and 5.3% in 2018. Over the medium and long term, the sufficient natural resources, abundant labor forces, as well as the government’s current infrastructure projects will unlock its growth potential. Thus, Indonesia’s economic growth is expected to average 5.5% in 2019-2021.
3. Indonesia’s general government fiscal deficit will widen slightly, although its debt repayment resources will maintain adequate. In the short term, the government will continue to implement policies of broadening its tax base and optimizing fiscal expenditure. Specifically, the government will try to increase fiscal revenues, mainly through tax revenues and fiscal expenditure on infrastructure, education and healthcare so as to boost economic growth. The primary fiscal deficit of Indonesia’s general government is expected to increase to 1.1% in 2017 and 1.2% in 2018. Correspondingly, the government’s financing-needs-to-GDP ratio is projected to be 4.3% in 2017 and 4.8% in 2018. Hence, modest financing needs, effective financing channels, as well as broad external support could guarantee stable debt repayment resources.
4. Indonesia’s government debt burden will rise slightly from a relatively low level, and the general government solvency in both local and foreign currencies will remain stable. In the short term, continuing fiscal deficit will lead to an increasing government debt burden, which is expected to rise to 28.1% in the next two years and still stands at a relatively low level. Meanwhile, long-term maturities could reduce the government’s debt repayment pressure. As of June 2017, Indonesia’s total external debt-to-GDP ratio has declined to 32.9%, and the coverage ratio of international reserves to short-term debt was 278.2%. In the short term, relatively low external debt, international reserves providing a buffer, as well as the relatively stable value of the Indonesian rupiah could guarantee that the government’s solvency in foreign currency remains stable.
There are two primary reasons for maintaining Indonesia’s sovereign credit ratings: first, asset quality pressure still exists in Indonesia’s banking system. The non-performing loan ratio of Indonesia’s banking system has increased, and these non-performing loans primarily concentrate on the mining and trade sectors - which are both vulnerable to external shocks. Also, the country‘s provision coverage ratio is relatively low and cannot cover all the non-performing loans of the banking system, thus there remains an insufficient total loss-absorbing capacity; second, as the Fed enters the rate-hike cycle and global liquidity tightens, capital outflow risks to Indonesia will increase, incurring potential risks to Indonesia’s financial system and its international balance of payment. Hence, Dagong will continue to monitor changes in Indonesia’s rating factors and risks, and thereof make corresponding adjustments if necessary.